Uncommitted Facility: What the Bank Has Not Promised

An uncommitted facility letter reads much like a committed one. It names a limit, a margin, the purposes the money may be used for, the reporting the bank expects and the security it holds. What it leaves out is the promise. The bank says it may make advances up to the limit, not that it will, and it keeps the right to decline a request without giving a reason and without the borrower having done anything wrong.

Banks use the form for lending that renews itself in short cycles: import trade loans and letters of credit, lines for foreign-exchange settlement, seasonal stock funding, and many business overdrafts. Each drawing is short and is usually repaid from the transaction it paid for. The bank's ability to stop at any point is part of how it controls the risk, and the borrower accepts it in return for a cheaper, simpler line that is quicker to arrange.

A commitment is a promise the bank has to be able to keep, so capital rules count the undrawn part of a committed facility as a partial exposure before any money moves. The Basel standardised approach converts an undrawn commitment to an on-balance-sheet equivalent at 40%, and one the bank can cancel unconditionally at any time without notice at 10%. National rules vary. The UK adopts those two figures from 1 January 2027; until then its rules use 20% or 50% for committed lines, by original maturity, and 0% for cancellable ones. Australia's standard has no 10% line: a cancellable line counts as a commitment at 40% unless it meets strict conditions, among them no fees and a fresh credit assessment before each drawing, in which case it is left out altogether. New Zealand's standardised rules set their own factors.

Liquidity rules draw the same line. Under the Basel liquidity coverage ratio, which UK banks and Australia's larger banks apply, a bank must assume that 10% of the undrawn amount of committed credit facilities to non-financial companies is drawn in a 30-day stress, while the run-off for unconditionally revocable, uncommitted facilities is left to national authorities. New Zealand's banks are measured instead under the Reserve Bank's own liquidity ratios. Less capital and less liquidity held against the line is why an uncommitted facility usually carries no commitment fee.

An importer of outdoor furniture, constructed for this page, has two facilities with its bank: a committed revolving facility of US$8m and an uncommitted import line of US$12m that funds supplier payments for 90 to 120 days until the stock is sold. Its plan for the coming season needs US$10m on the import line at the September peak, with US$3m drawn on the revolver.

In July the bank reviews the annual accounts. EBITDA has fallen from US$6.0m to US$3.5m after a wet summer and a discounting campaign. No covenant has been breached and nothing is in default. The bank decides it will hold the import line at US$6m of new trade loans for the season; the existing loans run to their maturities as agreed. All figures are the example's.

The importer gets through the season, but on US$1m of committed headroom instead of US$5m. The committed line absorbed the gap because the bank had promised it; the uncommitted line contracted because the bank had not. Had both facilities been uncommitted, the US$4m would have had nowhere to go, and the importer's choice would have been between smaller orders and late payments to suppliers.

Nothing the bank did was a default event, and nothing in the importer's other borrowing is triggered by it. Declining a request under an uncommitted line is the facility working as written.

Under a committed facility the bank must lend when asked, for the agreed period, so long as the conditions to each drawing are met: typically that no default is continuing and the representations are still true. The bank's way out runs through those conditions. If they are satisfied, a change in the bank's view of the borrower or the sector does not let it refuse. That obligation is what the commitment fee on the undrawn amount pays for.

Under an uncommitted facility there is no obligation to examine, so the bank's view is the condition. The difference shows in the wording, which a borrower should read rather than infer from the label: 'may' against 'will', 'at the bank's discretion', and whether the letter has an availability period at all. A revolving credit facility is normally committed; a trade line or overdraft is often not.

DEFINED IN ONE PARAGRAPH → · READING YOUR FACILITY LETTER → · THE COMMITMENT FEE →

It decides how a lender, an auditor or a board counts liquidity. Headroom on a committed facility is money the business can rely on while it complies; headroom on an uncommitted line is money it can expect only while the bank agrees. A cash flow forecast built on the second reads stronger than the business is, and a directors' going-concern assessment that leans on it needs to explain why the bank is expected to keep lending.

For the bank, uncommitted does not mean unexamined. The line is reviewed, priced and approved like any other, and the discretion it keeps is a credit decision each time it is used. A bank that declines without warning a customer it was content with last month is likely to lose the relationship. The discretion earns its value in a case like the importer's, where the results changed, the bank read them, and the season was funded on the evidence.

GOING CONCERN AND BANK SUPPORT → · PRODUCT FILE: TRADE LOAN →